2021 Parcel Express Roundtable: COVID-19 will have a lasting effect

Coming off of a year in which many aspects of everyday life have fundamentally changed, market conditions in the highly competitive parcel express market have gone into overdrive, with e-commerce activity climbing to unprecedented levels. This resulted in a much longer peak season, elevated rates, tighter capacity and more challenging service conditions.

What’s more, the effects of the pandemic have only bolstered the impact the duopoly of UPS and FedEx has on the market, while Amazon remains laser-focused on adding logistics and shipping capabilities.

On top of that is the growing presence of last-mile service providers—an emerging sector that shows no signs of slowing down. In turn, this confluence of events is keeping shippers on high alert in regards to how they approach rates, pricing, service levels and capacity commitments.

In our annual endeavor to keep shippers up to date on this fast-moving and ever-changing sector, we’re joined by Rob Martinez, founder and co-CEO for Shipware, an audit and parcel consulting services company; John Haber, founder and CEO of Spend Management Experts, a transportation, distribution and fulfillment spend management consultancy; and David Ross, research managing director, for investment bank Stifel.

Logistics Management (LM): How would you describe the current state of today’s parcel marketplace?

John Haber: Today’s parcel market is still suffering from a lack of capacity, driven by huge growth in B2C shipments. This has led to higher shipping and operating costs for both carriers and shippers and resulted in carriers implementing “peak surcharges” to help cover their increased costs. These trends have been occurring since the beginning of the pandemic, and are expected to continue until the vaccines are distributed and administered to more of the U.S. population. Until more consumers return to some sort of normalcy, the parcel marketplace will continue to face an environment that is more favorable to parcel carriers.

David Ross: Indeed, it’s busier than an umbrella salesman during a downpour. The acceleration in e-commerce trends has provided more volume than existing carriers can easily handle, especially during peak. This has driven further investment in the space and allowed for some new entrants to grow.

Rob Martinez: John and David are both correct, and I would add that things are constrained, and getting more complex. For the first time since the UPS Teamsters strike in 1997, demand for parcel shipping exceeds the supply. Faced with volume restrictions during the 2020 holiday peak, many high-volume shippers scrambled to find alternatives to compliment FedEx and UPS, all while COVID-
related surcharges and peak shipping fees were in full effect. In many ways, package consolidators, regional parcel carriers, and the U.S. Postal Service are still reeling from the volume avalanche.

Meanwhile, Amazon continues to make inroads relative to its internal delivery capability. Not only are shippers contending with limited supply and rising costs, but also the public’s continuing demand for fast—and free—shipping. In addition to our ongoing mandate to find cost reduction, in 2021 our clients have added requirements for capacity guarantees, carrier diversification, modal optimization, 3PL engagement, and faster, less than 3-day delivery.

LM: Can you describe the current rate and pricing environment?

Ross: For carriers, it’s the strongest ever, and the carriers are smarter and more targeted in their approach. Shippers will see higher prices.

Martinez: To steal a line from The Talking Heads: “Same as it ever was.” It’s challenging to understand and trending upward. Not only are shippers grappling with annual rate hikes as they do every year, but now they’re dealing with an ever-changing and complex array of pandemic-related and peak surcharges—a big challenge to understand as the qualifiers put forth by both carriers are at once both complex and convoluted.

Bearing the brunt of the carrier rate actions are shippers that process large, heavy, or residential packages, especially those whose current volume greatly exceeds pre-COVID volumes. It’s challenging to negotiate additional discounts in an environment in which UPS and FedEx are turning away business.

Haber: The cost of parcel shipping goes up for most shippers like clockwork at the beginning of every calendar year. However, additional price increases are being implemented throughout the year, often with very limited notice. This is due in large part to the growth of e-commerce, which was already trending upwards prior to the pandemic. And this year is certainly not an exception.

In addition to the average annual 4.9% rate increase, shippers are managing hefty increases on many surcharges such as additional handling, large parcels and residential and delivery area surcharge deliveries. In addition, UPS and FedEx have continued peak surcharges on international cross-border air services, as well as many other high-cost areas such as residential deliveries and delivery of larger, bulky items.

In short, the parcel capacity crunch has led to a difficult pricing environment for shippers, especially those with residential profiles. It’s critical for shippers to be managing risk and diversifying their logistics options more than ever as carriers are exercising leverage and maximizing profits in the current environment.

LM: What are the biggest lessons learned from the ongoing pandemic for shippers, and what changes are likely to become permanent?

Martinez: Good question. Remember when fuel surcharges were initially proposed as a temporary measure? Similarly, peak surcharges imposed on residential or large packages will likely become full-year permanent under the guise of the new e-commerce “strained capacity” norm.

With that, shippers should look to negotiate specific peak surcharge discounts and seek capacity guarantees in their contract. In addition, high-volume shippers will need to leverage multiple carriers—regionals, consolidators, postal—as a hedge in the event their primary carrier imposes volume restrictions.

As a heads up for shippers of larger packages, effective January 10 (UPS) and January 18 (FedEx), packages that measure greater than 105” in length plus girth will now incur an additional handling charge. Of particular note this year will be the addition, by UPS, of zone-based pricing for the large package surcharge and the additional handling surcharge effective April 11.

Haber: The need to diversify last-mile delivery options is one of the most critical takeaways. Here in the United States, we’re limited to a few nationwide last-mile providers that use their own assets from pickup to delivery—FedEx, UPS, USPS—which means capacity is limited. Shippers need to develop different strategies and incorporate additional options and solutions.

These could include regional small parcel carriers, crowd-sourced providers, local courier options as well as curbside pickup/BOPIS for those shippers that have a physical presence and alternative pickup locations including parcel lockers.

Another important takeaway is the need to manage risk from both a manufacturing and distribution standpoint. Huge cost increases on inbound international air and ocean freight, as well as container shortages are creating havoc for U.S. supply chains. Shippers need to more carefully evaluate the true costs and risks associated with offshoring.

Ross: I’ll add that lessons learned include that the cost of redundancy or multiple sourcing options is worth it. Shippers also need a last-mile solution, even if you’re brick and mortar with no online presence. And don’t forget that there’s no such thing as “free shipping” when you’re the shipper.

LM: What have been the biggest changes for shippers since dimensional pricing (DIM) divisors switched to 139? Have they adjusted well or do challenges remain?

Haber: The biggest changes for shippers adjusting to a 139 divisor are the huge cost increases that resulted. Many shippers have not adjusted well and do not have a full understanding of how the changes impact their shipping costs.

Many shippers are still not entering package dimensions while they’re manifesting shipments, and this leads to dimensional weight adjustments as the shipments move through the parcel carrier’s networks. We see this leading to unprofitable sales decisions for many shippers, and often leading to a competitive disadvantage versus their competitors that have implemented better processes and decision-making criteria.

Ross: If this was the only change, it would’ve been easier to adapt, but there are multiple changes to the pricing formula each year. So, if the shipper is not on top of their freight and their pricing, they’ll often be surprised by the costs.

Martinez: For sure, and by now almost every shipper understands dimension-based pricing and the financial impact of the 139 divisor, and most have done what they can to minimize air and empty fill of parcels.

There are three primary strategies to mitigate DIM increases. First, it’s best to negotiate an improved divisor, cubic exceptions, or custom dimensional variances. Second, shippers need to optimize packaging. And third, it’s good to contract with regionals and other carriers with less restrictive DIM rules.

However, an ongoing challenge for shippers today is ensuring custom negotiated DIM divisors apply to all shipments, including residential and SmartPost/SurePost shipments. During COVID, many shippers experienced a shift to residential deliveries, but unless they’ve refreshed their carrier pricing agreements, negotiated DIM concessions might not apply to those shipments. Additionally, shippers should proactively manage carrier contracts to avoid the rate hikes associated with terms that step down improved DIM divisors over time.

LM: How are market conditions affecting service, and what role is the current state of the U.S. economy playing?

Martinez: The shift to e-commerce throughout the pandemic has without question affected service. How carriers are dealing with this imbalance is quickly becoming a key differentiator. FedEx is all-in on e-commerce, expanding weekend services and widening its time-in-transit lead over UPS Ground Residential. Better utilization of existing assets has created capacity without huge capital expenditures. Committing to be the small- to medium-sized business (SMB) e-commerce carrier of choice, FedEx also made room in its network through high-profile breakups, most notably with Amazon.

UPS is taking almost the opposite approach. Focusing aggressively on better margins, UPS is curating the volume characteristics it wants in its network, hitting many loyal customers with exorbitant rate increases to force out the undesirable volume. In 2020, UPS cancelled promised service expansions into Sunday, and crowed about expanding a Saturday Ground product that still trails FedEx’s residential delivery population coverage by roughly 30 points, with no further enhancements announced.

In the wings is Amazon. The new Seller Fulfilled Prime (SFP) requirements took effect in February, with a second wave coming in June. By essentially requiring sellers to offer next-day service across the country, Amazon will drive business to Amazon Fulfillment and Amazon Logistics. Requiring sellers to ship six days a week puts pressure on UPS and FedEx to expand Saturday and Sunday pickups and deliveries. If the strategy works, Amazon Logistics may become the No.1 parcel shipper in the United States as early as 2022.

Haber: Because of the increase in e-commerce, demand for last-mile residential delivery has certainly increased. As a result, we’ve not only seen higher shipping costs and delays, but also capacity limits in the form of reduced weekly pickups and limits on equipment applied to some shippers by UPS and FedEx. This has led to parcel shipper’s suspending “delivery guarantees,” as well as increased average time-in-transit on deliveries.

LM: How are the more established carriers adjusting to the ongoing influx of new, last-mile competitors?

Ross: They don’t even notice, as they have more than they can handle. Right now, there’s plenty to go around.

Martinez: I agree, they’re not even batting an eye. We’re weeks removed from the peak 2020 shipping season and we’re still seeing new instances of volume restriction and divorcing less profitable shippers. As a result, it’s an open door for competition, and new competitors to the last-mile space will drive change.

Competitors will react to what works well. Consider FedEx One Rate that has seen great success in pulling profitable USPS Cubic volume. Amazon Logistics is warming up their initiatives to restart picking up and delivering non-Amazon volume from Amazon shippers. Drone delivery, autonomous vehicles, 3D printing, delivery lockers and robots will be common one day and all carriers will need to adapt.

Haber: I’ll add that both carriers have focused on later pickup times and speed as well as weekend deliveries. In its third quarter earnings, UPS announced it completed its Fastest Ground Ever initiative eight months ahead of plan. The initiative improves ground transit times between “millions of ZIP codes,” and, according to UPS, it will be at parity or better than the competition in 20 of the 25 most populated U.S. markets. According to its stats, weekend ground volume is up 161% versus last year and SMB volume on its Fastest Ground Ever lanes has grown 25.7% since UPS made the improvement.

LM: How can shippers diversify last-mile services to satisfy their volume requirements, given that there were many challenges in securing capacity over the course of the 2020 holiday rush?

Haber: The more options a shipper can provide to its customers, the better—curbside pickup, BOPIS, same-day delivery as well as utilizing FedEx, UPS, USPS and regional small parcel carriers. Customers want options depending on their day-to-day needs.

Ross: They have to start early, and they have to diversify before they need to. If you sole source, which is still a decent option for many due to pricing, you’re more likely to bump up against quotas and have packages delayed, so communicate demand levels as best you can with your carrier.

Martinez: I’ll suggest that a first step is to take an inventory of the available carriers and solutions through a market evaluation. Services may be limited based on geographies, pick-up points, package size/weight characteristics, and transit expectations.

Next, evaluate enabling technology to determine the most effective ways to enable least cost/best way routing. Analyze volume by DC location; mode; weight and zone showing counts; and average cost for each shipping lane. Look for natural densities by DC location, and be sure to compare only like services/transits.

Regional carriers should be considered when there’s enough volume within origin and destination footprints. Consider consolidators for national distribution needs. Last year, consolidators outperformed the USPS in both speed and costs due to the Postal Service’s inability to restrict volume. Finally, act with a sense of urgency. Shippers that didn’t already have alternative carrier relationships in place in early 2020 found themselves with nowhere else to turn but full network USPS.

LM: Given Amazon’s constant growth and scale, they continue to be viewed as a viable parcel and logistics operation. How do you view where Amazon is for both parcel and last-mile services and where may they be headed next?

Ross: Amazon has been forced to create its own distribution network to support the effort of third-party carriers and will continue to grow and be bigger in logistics. To date, they’ve been building a unique model that best serves their needs.

The long-term question is whether or not Amazon ever wants to be a true parcel carrier in the sense that you could ship a box of stuff from your house to your brother across the country using Amazon for pickup and delivery rather than UPS, FedEx and the USPS.

Martinez: Today, Amazon Logistics operates as the in-house, final-mile delivery arm of Amazon Fulfillment. It keeps costs significantly lower than private national carriers by eschewing pickups and long hauls, and by controlling the final-mile routing. By taking only the routes with the fewest miles to drive, most premium package characteristics, and the highest delivery densities, Amazon then saddles the USPS and UPS with the more expensive deliveries.

These less-desirable routes represent 20% to 25% of the population, which Amazon currently has little incentive to pursue. Already delivering two-thirds of its own volume, expect Amazon Logistics to continue expanding final-mile delivery until it reaches 80% self-sufficiency, with the balance going to alternative delivery partners.

Keep in mind as well that new Seller Fulfilled Prime mandates will force volume from FedEx and UPS into the Amazon Fulfillment network. These new requirements for nationwide, next-day coverage will make it difficult for sellers outside the Amazon Fulfillment network to keep their Prime designation. Unless an SFP seller can negotiate ground-like rates for UPS Next Day Air or FedEx Overnight or set up their own equivalent fulfillment network, the cost of meeting Prime requirements will become prohibitive.

Haber: Amazon has already become a viable parcel and logistics operation. According to parcel shipping data provider Shipmatrix, in July, Amazon delivered around 30% of total U.S. parcels. This percentage will likely grow as e-commerce volumes grow. As for market share gains, there could be a shift from using USPS to Amazon, but it’s unlikely UPS and FedEx will see significant market share loss to Amazon in the short-term.

Amazon will continue to build out its network, linking last-mile to the middle and the first miles here in the United States. They’re also building out their network in Europe by expanding last-mile delivery capabilities in the UK and partnering with InPost in Poland to build out a parcel locker network. Over the longer-term, we expect Amazon to increase their share of the parcel delivery market and implement small parcel transportation solutions for shippers that do not utilize Amazon for fulfillment.

LM: What advice do you have for parcel shippers in 2021?

Martinez: Don’t be complacent. If you aren’t proactively seeking capacity guarantees, developing relationships and pricing with multiple carriers or focusing on ongoing and incremental cost reduction and improved time-in-transit, then you’re going to be left behind.

It’s an existential threat for many businesses: The last thing you need while your customers are demanding fast, free shipping is a 25% rate hike in shipping costs or a backlog of packages sitting in a warehouse waiting to be picked up by a carrier that has capped your volume.

Rather, I encourage shippers to explore options including package consolidators, regional carriers and the USPS as well as multi-carrier execution technologies. Moreover, take a play out of Amazon’s playbook and move your inventory closer to your customers for faster and more cost-effective, inner-zone delivery. While only a few can own and operate their own single-use fulfillment centers, many shippers are wise to evaluate third-party warehousing and fulfillment options.

Haber: It’s never been more important for parcel shippers, especially large parcel shippers, to more effectively manage risks. Many large shippers were burned by huge cost increases as well as limits on shipment volumes. Parcel shippers need to monitor the marketplace on a daily, weekly, monthly basis as changes are rapidly evolving, and they need to prioritize good data as imperative to effectively managing their businesses. It’s impossible to make the right decisions without having good data, and too many shippers still have not made this a priority.

Ross: In the end, it’s the same theme from year to year: Know your freight and work with multiple providers to find the best deal and what works best for your business.